60 Minutes last night on the Stock Market

[Tia]

http://www.cbsnews.com/news/is-the-us-stock-market-rigged/

Hmmmm....

 

[Passepartout]

That was interesting. It must have caught some big-wig's attention too. I just saw on CBS News that an (FBI? I think) inquiry into this it being ordered. I have nothing against people making money, but not when it's at the expense of the masses just trying to swap a few shares in their IRA.

Jim

 

[easyrider]

Interesting article. Its crazy that this activity isn't illegal. Also odd is that cbs is reporting on this as they are owned by General Electric. GE is one of the biggest corporations in the world and also one of the biggest traders.

Bill

 

[ricoba]

Interesting article. Its crazy that this activity isn't illegal. Also odd is that cbs is reporting on this as they are owned by General Electric. GE is one of the biggest corporations in the world and also one of the biggest traders.

Bill

GE owns NBC not CBS. I think they are owned by Viacom.

 

[pedro47]

http://www.cbsnews.com/nnews is-the-us-stock-market-rigged/

Hmmmm....

Thanks for sharing this information and article . What is now going to happen ?

 

[artringwald]

If you use a limit order, you get exactly the price you want.

 

[Tia]

They are able to front run orders, buy before orders get through , so drive the price up before yours gets there.... even costing very large buyers like Hedge Funds more $$$$$$$$$$. 10's of Billions of $$$$$$$$$$$$$$$$$$$$$$$$$$$$

 

["Roger"]

Actually, I did not find the article as clear as it might be.

Basically, the high speed programs for the most part (see exception which led to Lewis's book below) don't know that you (a typical TUGGER) are about to buy 100 shares of McDonalds and beat you to the punch. Rather, they use complicated programs to set a probability of a stock going up or down in the near future based upon recent sales.

Put differently, they are doing momentum investing, something that some stock traders have always engaged in. ("Gee, the stock market is going up. I am going to buy into it now and resell in a couple of days and make a profit." Works fine if the market continues to go up, but you lose if it changes direction. Most people will tell you try to avoid investing based upon market timing. Good advice.)

What is new with the high speed traders is that they use complicated formulas to guess the momentum and then try not to hold on to a stock longer than twenty minutes max. (The short hold period will cut their losses is the computer algorithm turned out to have misguessed the momentum at the moment.) So, instead of a human trying to guess the momentum of the stock market, you have a computer program setting the probabilities.

[As an aside, the first person who came up with a formula to try to make money this way is the same person who figured out you could win at Blackjack if you kept track of which cards in the deck had already been played.]

Those who engage in this practice (not defending, just explaining) claim that this has made the stock market work more efficiently for all of us. If a bunch of orders for McDonalds had coincidentally come in all at once (or, a hedge fund wanted to put a large order in), previously the stock would take a brief momentary big jump up and then fall back down when it became clear the bump was just because of a momentary blip. (Sounds like the Facebook initial public offering.) With the computers buying and selling constantly, there is an immediate supply of stock buyers and sellers (all the high speed computers making their guesses) and so a stock will not take the big initial jump that it might have without the computer trading. Supposedly good for all of us in that price changes smooth out.

So what is Lewis's book complaining about. Brad Katsuyama discovered a problem that occurs for very large investors. (He works for a hedge fund, not in my mind the purest entity either.) His hedge fund would put in a very large order, too big to be filled in one place. So, part of it would be filled at the nearest computer location to buy and sell (in his analogy, buying the first two tickets at StubHub) and then go to a more distant computer buying and selling spot to fill the rest of the order (buying the remaining two seats at StubHub). The problem is that the high speed computers would have seen the size of his order, known that more had to be bought, race to the next buying and selling spot and buy the stocks his hedge fund needed ahead of him, and then sell it to him at a higher price. (Definitely not just business as usual - a computer program "guessing" what orders might come in based upon momentum.)

When Lewis says that we all lose on this affair, he is not talking about our individual orders, but the fact that we likely belong to a retirement fund and they are the type of entity that would put in a large order that could be overcharged via this scenario.

Hedge funds, high speed trading, retirement funds making huge investments all at once, people trying to make money on momentum (what good has been added to our economy), etc. All very complicated with mixed scenarios.

 

[artringwald]

FBI Probes High-Frequency Trading

In related news: http://www.bloomberg.com/news/2014-...-speed-traders-over-abuse-of-information.html

 

[ace2000]

If you use a limit order, you get exactly the price you want.

That usually works that way, not always though. Sometimes there will be a lot of price movement during the pre-market trading, and the average investor can do nothing during that time. I have been hit hard in the past even though I had a stop-limit order in place.

 

[normab]

I have never thought the Market wasn't somewhat controlled. How do the traders all make such big money compared to other professionals? They have insider info. I have friends whose husbands work on Wall St as traders, pulling in $300k a year doing nothing too stressful. They just know what to do, and when to do it, beating out all of the rest of the investors who are active traders.

And I learned early on, when I had a broker handle my first roll over IRA, that he would recommend stocks that his company had bought cheaply, and the sold it to me at a higher price a couple of days later. He didn't know more than I knew about researching stocks, he was just making the best commision he could. I fired him and have managed my own money since.

The problem is, today your money can't make money if you aren't in the market. With the interest rates being held so low, savers need to be in the stock for some portion of their savings. So you have to figure how to balance and diversify so you can manage the risk that is part of investing. You also need to buy and hold, or have a good trading strategy that prevents you from making emotional trades (resulting buying high and selling low).

Just my thoughts.

 

[easyrider]

GE owns NBC not CBS. I think they are owned by Viacom.

Yes, my mistake.
CBS was bought out by westinghouse electric corp in the 90's and was part of viacom.

Bill

 

[ScoopKona]

That was interesting. It must have caught some big-wig's attention too. I just saw on CBS News that an (FBI? I think) inquiry into this it being ordered. I have nothing against people making money, but not when it's at the expense of the masses just trying to swap a few shares in their IRA.

Jon Stewart nailed this when he had Jim Cramer on his show. The conclusion is that there are two stock markets. There's the stock market that you and I use (assuming you have investments in the New York markets). The market where you're not entirely sure of the outcome.

And then there's the stock market for the "players." The ones who gamble with our retirement money. Those guys are absolutely, 100% sure of the outcome because the market is rigged.

That show aired five years ago. My only question is why did it take 60 Minutes so long to get with the program?

Sadly, I don't expect anything significant to be done about it. Bernie Madoff was the only person who went to jail over the Wall Street meltdown. Why? He stole from other rich people.

 

[MuranoJo]

In case you haven't seen it, there was quite a debate on the NYSE floor today between IEX's Brad Katsuyama and BATS Goobal Markets president William O'Brien. Here's the link to the video on CNBC site.

 

[artringwald]

Mark Cuban's comments

I agree with Mark Cuban: http://www.cnbc.com/id/101539820

 

[pedro47]

Will the bull market now become a bear market because someone is now up set with all this media exposure?

 

[artringwald]

Why is this irrelevant to you?

I just got this email from my financial adviser quoting Bob Veres:

by: Bob Veres

What??! The Stock Market is Rigged???

You may have heard about the 60 Minutes interview with author Michael Lewis, a former Wall Street broker, author of "Liar's Poker" and "The Big Short," who has just come out with a new book entitled "Flash Boys." Lewis is an eloquent and astute critic of Wall Street's creative and predatory practices, and in his new book (and in the 60 Minutes interview) he offers evidence that the stock market is "rigged" by a cabal of high-frequency traders, abetted by stock exchanges and Wall Street firms.

The charge is entirely true. And it is also completely irrelevant to you and anyone else who practices patient investing.

Lewis is exposing a secret advantage that a surprisingly large number of professional traders, employed by large brokerage firms, are able to get when they build high-speed fiber optic cable feeds directly into the computers that match buyers and sellers of securities. Some of those traders actually have their trading computers located in the same room as the New York Stock Exchange and Nasdaq servers. And some pay extra for access to more information on who wants to buy and sell, more quickly, than would be available to you if you were sitting down at your home computer looking to buy or sell Apple Computer through a discount brokerage account.

All of this is perfectly legal, but Lewis points out that it is also shady. Why should some buyers and sellers have millisecond advantages over others? The companies that see more of the market, more quickly, are able to jump in ahead of you and me and buy stocks at lower intraday prices, and then jump ahead 15 seconds later and sell to the highest bidder before you and I would even see that bid on our screen. They can buy the stock you put in an order for and sell it to you at a fractionally higher price through the normal market-matching mechanisms. This way, they can squeeze out additional pennies and nickels on each transaction, and if they do this thousands of times a day, it adds up to real money--millions of dollars a year.

Why is this irrelevant to you? Many of those lost dollars are coming out of the pockets of day traders, ordinary people who are foolish enough to think that they can outwit the markets by moving into and out of individual stocks several times a day, or professional traders at hedge funds who may not have access to the fastest server or a direct feed into the Nasdaq servers. There are tens of thousands of these investors, and many of them, watching the 60 Minutes report, discovered for the first time that they are getting routinely fleeced by Wall Street's money machine.

However, if you're invested for the long term, it really doesn't matter how many times the stocks you own inside of a mutual fund or ETF, or directly in your retirement account, change hands or at what price every few minutes. It doesn't even matter whether your stocks are up or down in any given month or year, so long as the underlying companies are building their value steadily over time. Your time frame is eons compared with the quick-twitch traders, who hope to be in and out of your stock in minutes rather than decades. Your mutual fund that buys when a stock seems cheap might, if it's careless or unsophisticated, give up fractions of a cent on its purchases, but that likely isn't going to have a measurable impact on your long-term investment returns.

Somehow, this important fact was lost in the 60 Minutes interview. The interview also didn't mention that things can go horribly wrong in the arcane and predatory world of rapid-fire trading. The Hall of Fame of trading losses includes $9 billion lost in credit default swaps by a single Morgan Stanley trader from 2004 through 2006, or the $7.2 billion lost by Societe Generale trader Jerome Kerviel over a few days in 2008, or the $2 billion "London whale" losses in 2012. They--and many others--used their milliseconds speed advantage to generate staggering losses, proving that even the smartest operators aren't always raking in the profits.

In the end, the interview tells us several things. First, it exposes, yet again, the fact that the Wall Street culture will go to great lengths to grab money out of the hands of unwary investors. One wishes that the 60 Minutes interviewers had asked a simple question: what economic purpose is served by fast-twitch traders, trying to make money for their wirehouse employers by purchasing and selling individual stocks multiple times a day ahead of other investors? Is this benefiting the economy in some way?

Second, the interview makes plainly clear the folly of an average investor trying to outsmart the markets with short-term trading activities.

And finally, for those who can see the big picture that is never explained in the 60 Minutes interview, these revelations confirm the wisdom of having a long-term investment horizon. When you measure returns over three-to-ten year time horizons, the milliseconds don't matter.

 

[SMHarman]

Actually, I did not find the article as clear as it might be.

Basically, the high speed programs for the most part (see exception which led to Lewis's book below) don't know that you (a typical TUGGER) are about to buy 100 shares of McDonalds and beat you to the punch. Rather, they use complicated programs to set a probability of a stock going up or down in the near future based upon recent sales.

Yes, the market will just hoover up your 100 share sale as a blip. In fact these systems will probably result in your purchase or sale being inside the bid offer spread (NBBO) and praising your brokers systems for saving you money

Put differently, they are doing momentum investing, something that some stock traders have always engaged in. ("Gee, the stock market is going up. I am going to buy into it now and resell in a couple of days and make a profit." Works fine if the market continues to go up, but you lose if it changes direction. Most people will tell you try to avoid investing based upon market timing. Good advice.)

What is new with the high speed traders is that they use complicated formulas to guess the momentum and then try not to hold on to a stock longer than twenty minutes max. (The short hold period will cut their losses is the computer algorithm turned out to have misguessed the momentum at the moment.) So, instead of a human trying to guess the momentum of the stock market, you have a computer program setting the probabilities.

[As an aside, the first person who came up with a formula to try to make money this way is the same person who figured out you could win at Blackjack if you kept track of which cards in the deck had already been played.]

Those who engage in this practice (not defending, just explaining) claim that this has made the stock market work more efficiently for all of us. If a bunch of orders for McDonalds had coincidentally come in all at once (or, a hedge fund wanted to put a large order in), previously the stock would take a brief momentary big jump up and then fall back down when it became clear the bump was just because of a momentary blip. (Sounds like the Facebook initial public offering.) With the computers buying and selling constantly, there is an immediate supply of stock buyers and sellers (all the high speed computers making their guesses) and so a stock will not take the big initial jump that it might have without the computer trading. Supposedly good for all of us in that price changes smooth out.

This is how the algos that get your MacDonalds shares in the first example sold for between NBBO, not what this article is really talking about.

So what is Lewis's book complaining about. Brad Katsuyama discovered a problem that occurs for very large investors. (He works for a hedge fund, not in my mind the purest entity either.) His hedge fund would put in a very large order, too big to be filled in one place. So, part of it would be filled at the nearest computer location to buy and sell (in his analogy, buying the first two tickets at StubHub) and then go to a more distant computer buying and selling spot to fill the rest of the order (buying the remaining two seats at StubHub). The problem is that the high speed computers would have seen the size of his order, known that more had to be bought, race to the next buying and selling spot and buy the stocks his hedge fund needed ahead of him, and then sell it to him at a higher price. (Definitely not just business as usual - a computer program "guessing" what orders might come in based upon momentum.)

Brad worked for RBC.
Brad worked on the institutional trading / block order desk.
Brad took the call when your pension fund (say Fidelity) decided it wanted to reduce exposure to MSFT and needed to sell 3m shares at $41 a share that is a $123M order and about 9% of MSFT daily volume. Your fund wants a price now. So Brads job is to buy that block of shares from Fidelity and then 'work' the order and put those shares out onto the market.
Brads plan is that the commission from Fidelity, less the costs to get that position worked down to 0 will be positive.

What Brad discovered is that he would look at his screens for the price and depth of market and offer a price to Fidelity, they would take that.
Brad would then work the order and find those prices on the screen were not being taken up. Why?

Well the market is really about 60 odd trading venues. All venues can trade all stocks so while your MSFT is a NYSE listed stock you can also buy and sell it in Philly, Chicago, BATS, Direct Edge etc.
http://en.wikipedia.org/wiki/List_of_stock_exchanges#United_States_of_America
along with all the dark pools etc.

The electronic traders have bids and offers out there on all the exchanges, when they see activity on one exchange, they pull the bids and offers on the other exchanges and then repost based on the activity they see.

So Brad goes and places an order to NYSE, Chicago and Philly and that activity gets to the NYSE first. The electronic trader on the other side sees this and pulls their bids and offers in Chicago and Philly before Brads order gets to hit.

Thats what the miles of fibre optic cable do, make the order hit all exchanges at the same time reducing this microsecond arbitrage.

When Lewis says that we all lose on this affair, he is not talking about our individual orders, but the fact that we likely belong to a retirement fund and they are the type of entity that would put in a large order that could be overcharged via this scenario.

Yes. It means when our retirement fund adjusts its portfolio they price they get is not likely as good.

Hedge funds, high speed trading, retirement funds making huge investments all at once, people trying to make money on momentum (what good has been added to our economy), etc. All very complicated with mixed scenarios.

No Comment.

 

[ScoopKona]

I just got this email from my financial adviser quoting Bob Veres:

And I think your financial adviser isn't seeing the forest for the trees. There is no advantage whatsoever in an uneven playing field except for the privileged class who is benefiting from that uneven playing field. (Captain Obvious strikes again.)

The privileged people who work that privileged playing field went to the privileged schools and networked with other privileged people. The world doesn't owe them a privileged living. We're not England. There is no ruling class here.

Level the freakin' playing field. Everyone has the same risk and the same opportunity. And then the cream rises to the top and America prospers. I don't like how the stock market operates, and I haven't for years. And that's why the lion's share of my money is invested in real estate, which I manage myself. Slightly more risk (but INSURABLE RISK, that's huge), good enough reward to keep me doing it. I could make more investing elsewhere. I could also LOSE more investing elsewhere.

As I get older, I put less and less in the 401k and more and more in my self-managed real estate fund. I'm not ready to cash out entirely from the stock market. But I fear that big storm clouds are brewing over Wall St. (Hence my "invest locally" strategy.)

 

[Tia]

http://www.today.com/money/michael-lewis-new-book-claims-stock-markets-are-rigged-2D79467429

Another interview on TODAY SHOW